South Korea's Central Bank decided today to keep interest rates steady at 2.00% for the ninth month, meeting analyst's forecasts. The bank aims at supporting economic recovery before raising borrowing costs to avoid further won appreciation which is affecting exports negatively.
The Bank of Korea cut the nation's benchmark interest rate by 3.25% between October last year and February this year, the most aggressive policy easing in its history, hoping to stimulate economic growth and boost domestic demand that plunged since the beginning of the financial crisis.
However, the Korean government increased spending in order to boost consumer demand and help the economy find its way out of the worst recession since World War II. The government allocated as much as 67 trillion won to be spent on roads, hospitals and other infrastructure projects, in addition to cash handouts for households.
Low borrowing costs helped spur consumer borrowing; the BOK said that lending to households rose 1.4 trillion won in October recording 405.6 trillion won. On the other hand, the Korean financial regulator tightened rules on mortgage loans from non-banking finance companies to control the increase in lending.
Moreover, the central bank's decision came to avoid more won gains against major currencies; it's worth mentioning that the Korean won is the best performing Asian currency against the U.S dollar, rising 8.8% this year. The rising won is threatening exporters as it makes the nation's products less competitive.
The bank said in its statement today that economic activity showed clear signs of recovery, alongside improving economic conditions around the world. Exports continued to advance, while domestic demand and production showed further improvements.
The Bank added that uncertainties continue to threaten the economic recovery pace, and that may be the main reason that the bank kept interest rates at their lowest record; nevertheless, that may not be the case for a protracted period as Governor Lee Seong said that keeping interest rates at very low levels is not good for the economy.
Hiking interest rates remains anticipated by investors, especially with the cheerful fundamentals witnessed recently, such as industrial production rebounding 5.4% in September, while manufacturers' and consumers' confidence continue to increase, besides easing deteriorations in the nation's labor market as the jobless rate fell to 3.4% in October, the lowest in nine months.
The South Korean economy is on track, recovering from the global recession with a pace that appears to be stronger than other major economies. Finance Minister, Yoon Jeung Hyun, and Governor Lee expected gross domestic product to record an expansion for this year after the economy expanded 2.9% in the third quarter.
The KOSPI index rose 0.17% at 2:24 GMT inclining 2.64 points to reach 1596.92 points. Hyosung Corp's shares rose 13.64% gaining 0.65 points, while Hyundai Heavy Industries climbed 2.08% to rise 0.52 points.
